The majority of businesses will no doubt be aware of the increasing global focus on environmental, social and governance (ESG) policies and emerging regulatory frameworks for corporate disclosures.
But what does this mean in practical terms?
Companies now need to monitor regulatory requirements closely to ensure compliance. Those based in the Middle East not only need to keep an eye on developing requirements in the region but also globally, as international companies with a presence in the Middle East may also be subject to reporting requirements in the markets in which not only they, but also their suppliers, operate.
The consequences of being unprepared can be costly, involving not only the risk of prosecution with attendant fines and penalties, but also its impact on investors, stakeholders, employees, suppliers, and asset values. It is now a business resilience issue.
Businesses also face a heightened risk of disputes and potential regulatory or legal action against them if false or misleading ESG disclosures are made about how environmentally friendly and sustainable their products or services are—commonly known as “greenwashing”. If they haven’t already, businesses therefore need to take steps to ensure they are compliant.
Greenwashing risks in the Middle East
When world leaders gathered in Dubai for COP28 in December 2023, the topic of how best to tackle greenwashing was widely discussed. The region’s rapid transformation and focus on sustainability initiatives, such as in the renewable energy and sustainable infrastructure spaces, coupled with ongoing developments in regulation, means that businesses in the Middle East need to be more alert to greenwashing risks.
Examples of recent ESG regulatory developments:
- IFRS Sustainability Reporting Standards: In June 2023, the International Financial Reporting Standards (IFRS) introduced IFRS S1 (requiring companies to disclose information about their sustainability-related risks and opportunities to investors, lenders, and other creditors in their financial statements) and IFRS S2 (requiring climate-related disclosures). IFRS accounting standards are used routinely across the Middle East in the preparation of financial statements by both public and private companies.
- ADGM’s new Sustainable Finance Regulatory Framework: Introduced in July 2023, this proclaims to be the region’s first comprehensive Sustainable Finance Regulatory Framework including ESG disclosure requirements for certain entities in the Abu Dhabi Global Market (ADGM) to promote transparency and accountability for ESG practices. Investors in the region have welcomed the regulations as a helpful guide and protection against the risks of greenwashing. The regulator has broad discretion in terms of enforcement in respect of compliance with the requirements of the framework, acknowledging it may take time to develop the necessary ESG systems and controls.
- DIFC Sustainable Finance Framework: In October 2023, the Dubai International Financial Centre (DIFC) further announced its Sustainable Finance Framework. This came after S&P Global Ratings encouragingly gave the framework a positive Second Party Opinion (SPO), supporting that it aligns with certain recognised sustainable finance principles, guidelines and standards such as those of the International Capital Markets Association.
Though there do not appear to be any reported legal cases currently in the Gulf Cooperation Council (GCC) concerning greenwashing, this may change in light of increasing focus on this area.
It is yet to be seen how such claims may be advanced in the UAE, though it is possible they could be framed in the context of misrepresentation. From a UAE law perspective, this may be more challenging for complainants to advance successfully given that the UAE Civil Code only recognises fraudulent misrepresentation, which brings with it a higher standard of proof. In contrast, under DIFC law, it is possible to bring claims for both fraudulent and negligent misrepresentation, where a statement is made carelessly or without reasonable grounds for believing in its truth.
Nevertheless, there remains an overarching civil duty in both the UAE Civil Code and under DIFC law on contracting parties to act in good faith and—given the increasing regulation around sustainable financing practices—there is certainly potential for a rise in greenwashing litigation, as well as regulatory action. Greenwashing litigation can be costly, time consuming and cause serious damage to a business’ reputation and brand, whether or not the litigation or regulatory action is successful, so taking steps to mitigate such risks is advisable.
How to minimise risks
- Know your ESG obligations and seek advice to ensure compliance:
- First and foremost, you need to understand the relevant ESG requirements applicable to your business. In the Middle East, this is a rapidly evolving area and it is important to seek advice to ensure you keep on top of ESG developments and understand the remit of your obligations, for example whether reporting to a regulator is required at all or is mandatory or voluntary.
- Where ESG disclosures are required, seek advice as to the contents of such disclosures from your external counsel or ESG consultants, for example whether past statements should be clarified or corrected.
- Training:
- Ensure those responsible for ESG statements and reporting are provided with training and are aware of the requirements both from a compliance perspective and of common pitfalls which increase greenwashing risks.
- Take extra care with language:
- Avoid using broad overarching terms such as “sustainable” or “eco-friendly” without explaining or quantifying how products align with sustainability initiatives and practices. Where possible, consider including specific units of measurements to help properly inform customers and minimise greenwashing risks, and take care to use verified, reliable data and to keep this updated on your website.
- When making comparisons to competitors, ensure that you are comparing the same type of product—so as not to mislead customers—and that your data is credible, both for your own product and that of your competitors.
- Avoid stating that you are making a positive sustainable change in one area of the business if this negatively contributes to another. This is referred to as ‘greenhushing’.
- Misleading images:
- Finally, the use of photos of nature to give an impression that a product or service is green can be misleading if not justified. Care should be taken when selecting images for product packaging, websites, and marketing materials.
By Norton Rose Fulbright partner and Middle East head of dispute resolution, Nicholas Sharratt, counsel Ben Mellett, and associate Emily Greig.
